The sound quality is very good. You can definitely hear some signal noise if the volume is loud, but depending on the kind of music, you don't notice it as much. Meaning, the more instrument tracks there are in a given song, the less noticeable the signal noise is, but again, only when the volume is cranked.
I have both the USA SPEC PA15-TOY (iPod) and BT35-TOY (Bluetooth), and after I installed the Bluetooth module I tested it's wireless Bluetooth streaming from my iPhone. The sound quality was garbage. As I have read in several other places on here, the music streaming from the BT35 is OK, and it's convenient to be able to do it directly from your phone, but there's no bass for some reason.
As an audiophile, I'd like to think my standards are pretty high when it comes to sound quality, so hearing the full dynamic range is a must for me, especially because I added an aftermarket amplifier and subwoofer (bypassing the Mark Levinson factory sub). The USA SPEC PA15-TOY iPod integration module does the job.
Try turning the volume on your iPod down to 1/2, then use your radio volume to turn it up. That might take care of your distortion at higher volumes. I've seen this method work on other brands.